Do Funds Make More When They Trade More?

Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor

NBER Working Paper No. 20700
Issued in November 2014
NBER Program(s):   AP   CF

We model optimal fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund’s turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover and performance is stronger than the cross-sectional relation, as the model predicts. Also as predicted, the turnover-performance relation is stronger for funds trading less-liquid stocks, such as small-cap funds. Turnover has a common component that is positively correlated with proxies for stock mispricing, consistent with funds exploiting time-varying opportunities. Turnover’s common component helps predict fund returns.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


This paper was revised on April 14, 2016

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20700

Users who downloaded this paper also downloaded* these:
Kahn and McEntarfer w20698 Employment Cyclicality and Firm Quality
Chabot, Ghysels, and Jagannathan w20660 Momentum Trading, Return Chasing, and Predictable Crashes
Greenstone, Mas, and Nguyen w20704 Do Credit Market Shocks affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and ‘Normal’ Economic Times
Pastor, Stambaugh, and Taylor w19891 Scale and Skill in Active Management
David, Henriksen, and Simonovska w20769 The Risky Capital of Emerging Markets
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us